Why the Meta meltdown burnishes appeal of TCS, Infosys

Superlatives create headlines. And the intervening night of Thursday and Friday was as superlative as they come.

Tata Consultancy Services vanished – statistically, that is. Investors lost the equivalent of India’s technology powerhouse as more than $220 billion evaporated in a matter of hours in the biggest single-stock slump in US corporate history. Meta Platforms Inc., the parent of Facebook, had a meltdown.

Thursday night’s 26%-plus decline in Meta’s share price seemed to faithfully track the declining trend in tech-heavy Nasdaq in an eerie throwback to the start of the millennium. It is not surprising to see the 11-plus percentage point decline in the Nasdaq in 2022–a year likely standing out for steep rate increases.

Respective stock weightings show that the Nasdaq is tilted in favour of consumer technology – much of it in the womb of the future. Apple Inc. accounts for about 12 percentage points weighting, and the stock has held its own, losing barely 4% this year and contributing about half a percentage point to the index’s overall shrinkage.

Brakes on the future

But others haven’t been as lucky. Tesla Inc. has lost 22.5% so far. With a weight of 4.4% on the Nasdaq, the EV powerhouse has contributed about 0.9 percentage point to the decline of the index. Amazon.com Inc., with a 6.9% weighting, has shed 17% so far, making up more than 1.15 percentage points of the benchmark’s slide. Microsoft Corp., with a weighting of about 10%, has lost about 8.5% so far, contributing about 0.85 percentage point to the decline.

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And after Thursday’s spectacular meltdown, Meta Platforms has lost 29% for the year. With a weighting of about 5%, the stock has contributed about 1.45 percentage points to the decline in the index.

In summary, these five stocks – Apple, Microsoft, Amazon, Meta Platforms and Tesla – have contributed about 42% to Nasdaq’s decline, with Apple and Microsoft cushioning bigger falls in purely consumer-facing or futuristic technology. Netflix Inc, for instance, has contributed about half a percentage point to the gauge’s decline despite a weighting barely an eighth of Apple’s. The bespoke streaming platform’s stock has shrunk about a third, and despite only a 1.6% weight on the index, the impact of the Netflix decline is about half a percentage point.

Time To Log Out?

Such a swift reversal in the fortunes of technology stocks stateside has raised a big question mark on the fate of Indian outsourcing behemoths – and their stock valuations.

India’s technology and services outsourcing sector makes up about a tenth of the country’s gross domestic product – and more than a quarter of India’s top 15 listed firms by value. Just TCS, Infosys, HCL Technologies and Wipro are together more valuable than all of India’s public sector banks – and all the listed automakers and steelmakers.

Therefore, a meltdown reminiscent of the dotcom bust definitely prompts questions about the immediate stock prospects of India’s Big Four.

Buy On Dips

Odds are short they will be battered. Rather, they are conviction buy-on-dips candidates.

“Aggregate revenue for Top-5 IT services firms grew by 5.2% (constant currency), the highest in five years, despite a seasonally weak quarter,” Jefferies said Friday in a review of the three months to December. “Revenue growth was broad-based across verticals, driven primarily by retail, communication and manufacturing… Revenue growth for Infosys, HCLT, TCS and TechM was ahead of expectations at 4-7.6%.”

The brokerage has either ‘hold’ or ‘buy’ ratings on Indian outsourcing pureplays – and the reasons aren’t far to see.

The global scenario does bring back memories from the turn in the millennium, but those memories are rather sweet for Indian companies. As Y2K 20 years ago helped establish the credentials of Indian technology from Tokyo to Toronto, digitisation globally is expected to bolster revenues and profitability of Indian technology powerhouses that have scale few on the planet can match.

“With commentary from companies across key verticals highlighting the importance of digital transformation spending, the demand outlook looks strong,” Jefferies said.

That dovetails neatly into the shifting investment theme in favour of value – and clear revenue visibility – in the global money hubs of New York, London and Tokyo. As central banks in the OECD row back on accommodative monetary policies and money becomes less abundant, the risk-off trade favours those themes that offer medium- to long-term revenue visibility and sustainable competitive advantage that can’t be replicated easily.

Raamdeo Agrawal, one of India’s best-known long-term wealth creators, wrote on ET’s pages after the Union Budget 2022-23 that technology remains one of his favourite picks, regardless of the domestic macro situation.

“Budget or no budget, I remain very bullish on Indian IT,” Agrawal wrote. “Global digitisation is like yet another Y2K moment for the sector.”

Over the past three decades, he has rarely erred.

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